There’s life in the USD Yet

It was an interesting day in currency markets yesterday. The USD staged a firm recovery following far stronger revisions to Q2 GDP, as well as firmer numbers from the ADP employment report which now sees the USD index trade over 1.4% higher from the week’s lows. The Euro found itself facing some selling, speculation that the ECB will look to take action to reduce the surging Euro’s value has begun to grow but we’ll have to wait until next Thursday’s key ECB meeting before finding out what the ECB plan to do. For now it looks like the Euro may have put in a top and could face selling into next week’s meeting as Euro longs look to take some profits and take some risk off the table ahead of the big event.
EURGBP actually faced its largest 1 day decline since March 30th, when the UK finally announced Article 50. Geo-politically we have seen things subside somewhat, for now at least. Risk continues to find itself well supported with major indices trading higher through yesterday and this theme continued overnight and into this morning’s European open.

The USD staged a firmer recovery following an upwards revision in Q2 GDP to 3% from an initially guided 2.7%. Household consumption was up 3.3% which contributed heavily but it was business investment that was also an eye turner. At the same time the ADP employment report showed 237k jobs added through August, far ahead of expectations of 185k, this was also an upwards revision to last month’s figure.

We highlighted yesterday the impact better data would have on the USD, especially given how much negativity had been priced with the markets ruling out rate hikes until Q2 2018 and we have plenty more key data scheduled to cross our wires into the end of the week.
Inflation has been a sticking point for US rates and the Fed’s official measure, the Personal Consumption Expenditure reading is expected to show a drop from 1.5% to 1.4%. Tomorrow will also bring the NFP print and manufacturing data as well so if the data from the US can show some signs of firming, there is plenty more scope for USD upside.

Euro selling has not stopped since Tuesday’s highs and 1.2000 in EURUSD and .9300 for EURGBP now form a slight psychological barrier ahead of next week’s big ECB meeting. The Euro selling we have seen in recent days is certainly not indicative of a reversal, rather just taking some risk off the table as major event risk is just around the corner. The big question will be what exactly the ECB intend to do next week, markets have built up and expectation that they will look to scale back on their asset purchase program while extending it into next year. Despite this amounting to additional easing, the Euro has surged over 10% as these expectations grow. However if the ECB sound more cautious or leave their asset purchase program duration open ended, then Euro positioning will likely shift and selling will begin. If they openly comment on the value of the Euro then it will almost certainly be negative for the single currency. For now it is a wait and see game and with month end flows to take into account today, there will likely be plenty of chop.

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